This morning's Producer Price Index (PPI) report gave some relief to investors, suggesting that the worst of the renewed inflationary pressure that we have seen in the first quarter of this year is behind us, and that the Fed’s favorite inflation metric, core PCE, which will be released on April 26, could actually show signs of inflation resuming its downward trend.
Futures had been indicating a significantly lower opening this morning, but immediately corrected back to somewhere around flat after PPI as I write this. With the inflation data looking somewhat inconclusive and out of the way for now, I’m sure many traders’ thoughts then turned to earnings.
For most market watchers, earnings season really begins tomorrow, when some big banks such as JP Morgan Chase (JPM), Wells Fargo (WFC), and Citi (C), will release their Q1 earnings reports. I understand that those results will be interesting to some and that the banking sector matters in some ways, but there was an early release of calendar Q1 earnings this morning that I regard as far more informative than those, but which usually flies a bit under the radar. The news there was, on the surface, not encouraging. It may not, however, be as bad as the stock’s reaction suggests.
First off, I should explain why I am not too excited about tomorrow’s bank earnings.
The habit of parsing through bank earnings in detail really began after the 2008/9 recession. Bank liquidity and profitability was a key thing back then, and even the many people who hated Wall Street at that time still wanted to see good bank results. There are, however, two main problems with placing too much emphasis on the earnings of financial institutions, particularly the big, multichannel names.
First, traders and investors should be careful not to react to bank earnings too quickly. Their reports are incredibly complex, with a lot of moving parts. It takes time to go through all of the charges and credits that usually accompany them and to arrive at a number comparable to the published consensus estimates for EPS and revenue.
Second, while bank profits were an important part of the recovery in 2010 and 2011, they are not typically all that indicative of the health of the economy. The main revenue source for most big banks is trading; trading profits are no indication of the health of the economy. You can look beyond that at loan demand and other “high street” indicators, but again, that takes time and initial impressions based on overall results can be misleading.
To me, the results of another early reporter, Fastenal (FAST), from this morning, are far more impactful and interesting, without all the homework. Fastenal makes and distributes wholesale supplies to the construction and industrial markets, so the relevance of their performance is fairly obvious. They are a bellwether for the part of the economy that makes actual things, as opposed to banks, which makes only money.
So, at first glance, Fastenal's misses on the top and bottom lines, and the fact that their stock then immediately dropped around 8% in the premarket, is a worrying sign.
That EPS miss, though, was by only a penny, and the revenue miss was a small one, too. It seems that what caused such a big drop in the stock was not the numbers themselves, but rather some accompanying comments from CEO Dan Florness.
One phrase in particular stood out when Florness said "the core issue remains poor demand." Poor demand in the construction and industrial sectors of the economy is a problem, but Florness also gave several good reasons why that demand may have been a bit weaker than anticipated.
He pointed out, for example, that the Good Friday holiday fell in March this year and that the weather was particularly bad early in the year, which would obviously have a negative impact on demand for construction.
It seems to me that while Fastenal's CEO is saying that poor demand is a problem, he is also saying that a set of one-off circumstances were largely to blame for that poor demand in Q1. That means that the big drop in FAST is probably an opportunity rather than a warning, and that there is still a chance of an earnings season that will more than offset the negativity around interest rates staying at current levels for longer than the market has anticipated thus far.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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